Why Our Health Care Lets Prices Run Wild

Of all the oddities of the U.S. health care system, one stands out: we spend far more on health care per person than other industrialized nations yet have no better health outcomes.

Understanding why isn’t easy. A 2012 paper by the Commonwealth Fund found that among 13 industrialized countries studied, the U.S. has the highest rate of obesity, which is usually a factor in higher health care costs.

Yet, the U.S. ranks far behind many other countries in our rates of citizens who smoke or are over 55, two other strong indicators of increased spending.

So why is our health care spending more than 17% of our gross domestic product, far more than any other country?

In the recent debate over health care reform, two often cited culprits were fear of malpractice lawsuits and our complex health care payment structure. Doctors and hospitals practice “defensive medicine,” critics charge, ordering extraneous tests and procedures to protect themselves in the event of malpractice claims. This leads to overuse of the health care system.

Likewise, “fee-for-service” medicine, in which hospitals and doctors are paid separately for every treatment, procedure or test they perform, also encourages overuse. And yet, the same Commonwealth Fund study found that while we may be consuming more health care than we need, we aren’t nearly as guilty of this as, for example, Japan. There, patients consult with doctors, on average, more than 13 times a year, compared with the U.S., where patients have about four doctor consultations annually. Or how about Canada, where patients receiving acute care stay in the hospital an average of 7.7 days, compared with our 5.4?

A central reason U.S. health care spending is so high is that hospitals and doctors charge more for their services and there’s little transparency about why. There is no uniformity to the system, in which public and private insurers have separate, unrelated contracts with hospitals and doctors. The result is a tangled, confusing and largely secretive collection of forces driving health care prices higher and higher.

This isn’t possible in many other countries either because governments set prices for health care services or broker negotiations between coalitions of insurers and providers. Known as “all-payer rate setting,” insurers in these systems band together to negotiate as groups. In contrast, U.S. insurers closely guard the secrecy of their contracted prices with health care providers and negotiate individually. This is why a hospital hosting five patients for knee replacements might get paid five different amounts for the surgeries.

In Japan, where private insurers cover most of the nonelderly and nonpoor, prices for health care services are the same no matter the provider or payer. Other countries, like Luxembourg, Switzerland, Germany and France, also have rates set or brokered by the government.

Per capita health care spending in all five countries is lower and grew more slowly than in the U.S. between 2000 and 2009, according to data from the Organisation for Economic Co-operation and Development recently cited by Sarah Kliff of the Washington Post.

Yet, you don’t have to go to Europe to find rate setting. The state of Maryland has been setting rates for health care services since 1971, which has helped control the rate of cost increases for patients and public and private insurers. According to a 2009 study published in the journal Health Affairs, if the entire country’s health care costs had grown at the same rate as Maryland’s between 1976 and 2007, we would have spent nearly $2 trillion less on health care.

But Maryland’s system, however economical, isn’t likely to be replicated across the country mainly because providers who now receive uneven, but high, payments from insurers don’t want pay cuts. A study published in Health Affairs in April comparing the health care cost-containment strategies in the U.S., U.K., Canada, France and Germany concluded that “it seems unlikely … that the U.S. system will move toward the types of volume and price controls used in the countries examined.”

During the debate that preceded passage of the 2010 Affordable Care Act, rate setting was mentioned by some policy experts but never gained traction. In the charged political environment surrounding health reform, end-of-life counseling was unfairly maligned as death panels. It’s easy to imagine that a rate-setting system could have been portrayed as giving the government total control over health care, even though most other countries that use rate setting also have robust private health care industries.

The Affordable Care Act, which fully takes effect in 2014, uses some other techniques to curb the growth in health care spending — like phasing down some fee-for-service payment structures — but even if these strategies work to save money, it’s unlikely the price transparency that comes with rate setting will become a reality in the U.S.